Rahul Jacob: The SEZ fixation

After listening to a presentation by the leader of the reformist provincial government of Guangdong, China’s southernmost province, in April 1979, the late Chinese leader Deng Xiaoping said, “We can mark out a piece of land and call it a special zone.” With that utterance, Deng created an avenue to allow entrepreneurs and foreign businessmen to set up factories in what was then a profoundly Communist country.

In 1984, to bolster the cause of economic liberalisation, Deng embarked on a famous Southern Tour on which he praised the effects of the reforms. When you drive around Shenzhen today, you see enormous billboards of Deng, commemorating this important affirmation of China’s experiment with free enterprise. The city famously is home to the more-than-200,000-employee factory – a township really – of Foxconn, the maker of Apple’s iPads and iPhones.

Reporting on the factories of southern China between 2010 and 2013 as a foreign correspondent based in Hong Kong, I often stood outside that imposing factory and wondered what it would take to lure such factories to India. Of one thing, I am certain: India will not narrow China’s huge lead on us by building large special economic zones (SEZs). Deng, the supreme pragmatist, used SEZs as a way to introduce private enterprise into China. India’s socialist republic with its overlay of crony capitalism has latched on to SEZs because a) for governments, it is a way of sounding pro-business by espousing an idea China had, albeit 35 nears ago, and b) for business, it is a convenient way to transfer the headache of amassing land to the government and get it at below market prices in the bargain. In a country replete with good deals and insider trades, this is the best one of them all.

Governments come and governments go, but the hypnotic appeal of SEZs never wanes. The Bharatiya Janata Party government is rightly focused on improving India’s ease of doing business scores as a way to attract investment, but on Saturday Prime Minister Narendra Modi was extolling the virtues of SEZs at a ceremony in Maharashtra to lay the foundation stone of the Jawaharlal Nehru Port Trust Special Economic Zone. He and Maharashtra Chief Minister Prithviraj Chavan jousted about who was responsible for the fact that many SEZs have not come up at all because of confusion over the tax rate that would apply to them. Mr Modi was quick to underline that SEZs will play a key role in boosting India’s exports.

Even the most absent-minded look at the percentage of exports from SEZs suggests that almost three quarters of India’s exports come from enterprises that do not operate in SEZs. Put differently, the vast majority of exporters in this country are nimble enough to clear the obstacle race bureaucrats have devised for them without operating in SEZs.

What everyone in the government, from Mr Modi and Mr Chavan down, must do is to concentrate on getting the government out of the way of business while regulating predatory practices and environmental abuse. Doing away the absurd regulations of the Boilers Act is a very good start, but it is only a start. Trouble is, increasing the ease of doing business in India is the sort of goal that is frustratingly diffuse, dauntingly large and requires a wholesale transformation of the country. “SEZs are a declaration by the state of its inability to fix the country,” says Manish Sabharwal, chief executive of Team Lease. “At a certain level, people have given up on the state’s ability to execute on a large scale.”

Earlier this year, I visited the most celebrated SEZ of recent years, Sanand in Gujarat, and wondered why in a state with a population so entrepreneurial and roads this good the state’s intervention was needed at all. True, the land was owned by the Gujarat agricultural university, so no farmers lost their land in the process. Those who had sold their land nearby for ancillary auto projects said they had done so at market prices. But there still remains the problem of fairness. The objections also include how large it is – does Tata really need 1,100 acres to build one of the smallest cars in the country?

A just published book edited by Indira Hirway, Amita Shah and Ghanshyam Shah lays bare how little of Gujarat’s subsidies went to small and medium enterprises. Between 2001 and 2011, it was as little as 2.27 per cent, excluding subsidies for water, land and infrastructure. Factor in large subsidies for land, for instance, almost always given to big companies like Tata and Ford rather than Induben’s Khakhrawala delicacies store in Ahmedabad, and the percentage of subsidies directed at small businesses must be microscopic. The causal link between SEZs and exports is hard to establish, and even harder to defend because they favour the rich.

Pushing for more SEZs even as farmers’ opposition to them grows across the country is as unrealistic as pursuing “zero defect” manufacturing in India; even the Japanese and American gurus who propounded Total Quality Management and Six Sigma set a goal of six defects in a million. What governments across the country need to do is simplify the archaic, often British-era ideas governing factories and labour in India just as Rajasthan is systematically doing. When a colleague and I asked Rajasthan Chief Minister Vasundhara Raje last week if the state was moving towards a single-window clearance, that much recited and ultimately bogus promise of central and state governments from the early 1990s onwards, she laughed and replied, “I don’t want to use that word. It is a much maligned one.” (One day perhaps SEZs will be regarded that way.) Instead, Rajasthan is concentrating on the more practical goal of reducing the number of permissions required to do business. That is what governments across India should be doing, not celebrating SEZs.